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That Rumbling Sound Is the Dollar Giving Way
For nearly twenty years, we haven’t flinched from our prediction that the massive debt build-up of the last generation would precipitate out as a deflationary bust. That is what we still expect, although we now believe there is likely to be a hyperinflationary phase at some point as the financial system implodes. But the bottom line is that no matter how things play out, America’s standard of living will fall more steeply than at any other time since the Great Depression. As for the deflation-vs.-hyperinflation “debate,” it is useful only to the extent it helps predict how mortgage debtors will fare as this economic cataclysm plays out. We seriously doubt they will be “saved” by the kind of hyperinflation that would put hundred-thousand-dollar bills in Joe Homeowner’s wallet. Imagine how mortgage lenders would react if Joe could peel off three or four of those bills and say, “Okay, pal, we’re square.” This scenario will seem particularly unlikely to those who believe that these economic hard times have been engineered by Masters of the Universe intent on stealing our property. Trust us on this: If there’s a hyperinflation, it is the rentiers who will get screwed most ruinously, not the little guys. Even so, that doesn’t rule out the prospect of a fleeting, hyperinflationary spike on the way down, since widespread notions concerning the dollar’s true value could change precipitously overnight. We mention this because notions are already beginning to change in ways that leave the dollar increasingly vulnerable to a global run. The exploding caldera of fear that will eventually bring this about bubbled to the surface yesterday when the Fed confirmed yet again that it is absolutely clueless about how to get the economy moving. The central bankers’ muddled talk of still more “quantitative easing” (QE2) is about as reassuring as the promise of more sanctions against Iran. Paul Krugman may be the last person in America who still believes that additional heaps of “stimulus” will do the trick. On Wall Street, however, the belief is clearly ascendant that QE2 will only wreck the dollar without providing any lift to the economy. That could explain why stocks fell yesterday while gold and silver soared. Not that the yahoos on Wall Street exhibited perfect knowledge. To the contrary, the broad averages shot up initially, driven by headless-chicken panic, and T-bonds finished the day with anomalously large gains despite the louche tittering about further easing. Schiff’s Scenario Peter Schiff has provided the most plausible scenario for a hyperinflation. He foresees a day when confidence in the dollar collapses, as it eventually must, forcing the Fed to become the sole buyer of Treasury debt. When municipal and corporate bond traders realize on that same day that there is no official support for their markets, private debt will go into a death spiral, forcing the Fed to monetize all bonds. Under the circumstances, the Fed would not become merely domestic debt’s buyer of last resort, but the only buyer. Voila! Hyperinflation. It should be noted that it is not some certain quantity of money injected into the banking system that will cause hyperinflation; rather, it will be the repudiation of all dollars already in circulation. Holders of physical dollars will panic to exchange them for anything tangible, causing the dollar’s value to fall to zero in mere days. Everything needed to trigger this collapse is already in the pipeline, and it is only the truly benighted, Nobelist Paul Krugman foremost among them, who cannot see the obvious. As for mortgage debt, you will still owe $250,000 on your home the Day After, except that your home will be much more deeply underwater than before – worth perhaps $20,000 instead of $180,000. Mortgage lenders will have to work with you – work with scores of millions of homeowners who are in the same boat – to bring about a reconciliation. No one can predict how already-unpayable mortgage debt will ultimately be paid, but it is almost certain to require a radical change in our laws in order to avoid the kind of social upheaval that could jeopardize the very rule of law.
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There mere fact that there is so much chat about the possibility of hyperinflation is evidence enough that confidence is the Dollar is in the early stages of collapse!
Au contraire mon frere.
$USD targeting 115 from 79.56:
http://stockcharts.com/charts/gallery.html?%24usd
What if you bought a house in Charleston in 1862 and gave your note promissing to pay in Confederate dollars in five years.
Do you think anyone even bothered to collect such a debt? By 1867 the Confederate dollar was worthless.
The lender got the house, maybe worth more than the loan, probably less.
Banks have a tough road ahead, as Fall Elections removing incumbents may prove they cannot steal any more from the taxpayers.
FAZ.
http://www.jubileeprosperity.com/
The lender got the house, maybe worth more than the loan, probably less.
Banks have a tough road ahead, as Fall Elections removing incumbents may prove they cannot steal any more from the taxpayers...
That was a good article Rick, very good. I wondered myself how debt would be settled in case of deflation and hyperinflation. My problem with the banks having to work with the individual who's mortgage is 250,000 but the house is worth 20,000 is the investors of the mortgage bonds. You see when we had that national program to help homeowners to negotiate with the bank (didn't work, they went back into trouble), I read the program and it was exactly as I thought. The govt. was subsidizing the payment to the investors in order to have the payment look like a regular payment. So if your mortgage was 800 and you had a workout for 600 then the govt. made up for the rest, and that was only for a so many months (there was only 50 billion for the program I believe) and people with those super large mortgages couldn't apply. This was being done because the govt. knew and the banks knew that they couldn't force the bond holders to change the amount of money that they would be getting on their bonds. If they did the issuer of that bond would be in default.
So if your Gunther bank in Germany and you buy 1 billion dollars of MDO truanches, by whatever you contracted for you will be getting paid on those bonds a percentage over the course of the time you contracted for. In the fine print, it says that if the timing of the bond payment and/or the amount of the payment isn't correctly paid to the buyer of the bond then the issuer of the bond is in default. That means the issuer is forced to buy back the bond at full price plus penalties immediately. Citibank and those other large banks don't have hundreds of billions of dollars liquid and sitting for them to pay back those bonds. This would be in the media and it would be impossible for them to hide this. Because once you default as a bank you get downgraded and on top of the downgrade that also makes other buyers sell or call in the bonds. Because some organizations or countries may only buy certain debt at certain ratings and if the ratings are lower then it's automatic. And two they couldn't print money because if it's out in the public then everybody can add and count and if 200 billion or 400 billion is taken off of the books of Citibank or another large bank then they will see what is left and they will automatically know that the bank is insolvent.
That is why the govt. and other institutions are by hook or crook hiding and playing make believe with their books. Because once the string is pulled on this whole thing, it will unravel so many problems that there isn't enough money to be found to fix it. And if you print, it will be hyperinflation for sure.
Oh, usually what protects the buyer of bonds is the buying of insurance. So if the issuer is in default the insurance company will payout on the default. But guess who the insurer is on the majority of the planets bonds AIG. And AIG was investing the premiums in the same junk they where insuring against.
Bingo
The Germans did both the post WWI hyperinflationary pay off your mortgage with a week's pay, and the post WWII pay hyperinflationary pay off your mortgage with a week's pay combined with a fifty percent of your assessed value off your house government mortgage (used to pay social security pensions so as to keep taxes low) scenarios.
Japan post WWII did a similar scenario, but with a ten to ninety percent tax on property, depending on how much property you had.
Your guess is as good as mine what will happen here. I'm predicting we have a Japanese scenario to pay off the government pensions with the rich people's (top 1%) money, and to pay off the social security pensions with the upper middle class people's (top 90 to 99%) money.
You pays your money and you takes your chances.
For all the "American Empire" conspiracists. As always, no number by itself can be made to prove a point. Surely, you know, however, that the U.S. GDP/military expenditure ratio puts us approximately 28th in the world, slightly ahead of China and slightly behind Russia. Plus, if you look at the U.S. GDP/military expenditure ratio over time, we are currently well below the annual average during the Cold War. Remember the military establishment is an insurance policy. Unfortunately, for the conspiracists not only is our "insurance" relatively inexpensive (as defined by our income), but, on average, it's been pretty successful, both for the U.S. and the rest of the world! Money well spent. My thanks to those who serve.
Utter disinfo nonsense, expatincentam:
Last year only the House of Saud spent a larger percent of GDP on police state defense,
8.2% versus USA 4.3%, Russia 3.5%, South Korea 2.8%, India 2.6%, UK 2.5%, France 2.3%, China 2%.
In actual spending, the USA outspends the next 14 largest defense expenditure countries...
http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures
expatincentam,
First of all, I assume you have so named yourself because you've expatriated to Central America. If so, then you can spare us the patriotic bullshit.
Second, GDP includes government spending, which is rapidly swamping the US economy. It is all but meaningless, in other words, relative to the American empire's killing apparatus, which, along with the Federal Reserve, constitutes the most deadly force on the face of the Earth.
The most deadly force on the face of the earth you know is better than the most deadly force on the face of the earth you don't know.
Rick, this is incoherent.
However, the trajectory matters when we can hit margin calls or get stopped out along the way. The likely scenario is deflation intermediate term which crushes the middle class (& other debtors who have mismatch between nominal and real denominations), followed by hyperinflation to crush those of us who retained some paper assets.
Own your house outright, or rent (there will be lot of real estate for sale at cheaper prices than today's). Have real skills. Retain some real assets like gold (Seth Klarman is buying gold, that should be a pretty good indicator that it might be needed as money).
The short treasury trade has been death over the past year but it's probably about to pay off. Max pain in that trade will come if there is a euro collapse since there will then in fact be nothing else to buy than dollars; otherwise, long term treasuries at 2.5% can only win vs. a world with neither deflation nor inflation.
First off, mortgage lenders are not the deciding factor in this scenario (especially their reactions to it). The deciding factor is Joe's ability to retain his real wealth during the hyper-inflationary period. Rick's doubt should be if Joe can survive until then, which, if he saves his wealth in dollars, is not possible (got to spend those 100k notes for food!). So for 99% of the Joes out there, they will not have any bills left to peel off.
The 1% that do will be holders of real wealth such as gold or silver who stand ready to retire a note at any time with a pocketful of coin they can liquidate for the currency du jour.
If TSHTF all this talk of valuations is moot. Riots, looting, lawlessness will take over. At least in the beginning. Anyone's guess after that.
I think Benny and the Feds would be happy to get away with 15-20% inflation per annum for the next ten years or so.20% for ten years would render a dollar today to a dime,and wipe out all the debt overhang.
The Fed took a 100 years to reduce a dollar to less than 5 cents and if they get away with the above they will have repeated it in just ten years, everyone will probably consider Bernanke a hero for having saved America and the financial system.All he will have achieved is a reset for the entire process to start all over again.
Nothing will change until people stop voting for the two party system that perpetuates it.
I think Benny and the Feds would be happy to get away with 15-20% inflation per annum for the next ten years or so.20% for ten years would render a dollar today to a dime,and wipe out all the debt overhang.
And wipe out bank derivative mortgage loan assets many times over, thus guaranteeing the failure of the financial system.
No, at some point closer to the bottom, banks may be foreclosing real assets in size, not just the current trickle.
IG says GM would have to go public at $134 to repay taxpayers. All those DiTech 125% Loans to Value coming home to roost with new Ally GMAC...
As usual, people seem most confident at the top.
Odds pretty good Gold and silver set a meaningful high at 1298 and 21.20 today,
while USD set a meaningful low at 79.77...
As usual, anonymous junk confirms the fade trade...
By ZH groupies who were out or short bonds or equity since March 2009?
Big thanks and hat/tip to Manitou Mike. I thought I was goin nuts. You got it correct. Our author has the polaity switched. The government keeps printing enormous bills, and at some points swaps the new one for a lot of the former one. This kills savers, especially fixed income savers.
You can have both inflation on things we need such as sugar and wheat, and deflation on major assets such as houses and cars, which we need to sell off to get of debt and buy the ever increasing food.
I am also astonished at how many well read and thoughtful people can disagree. Krugman and Ferguson the stars of two very distict and persuasive viewpoints, what will the dollar be worth in twenty years?
We do know that the world is following us in TV and Internet ownership and participation, so I guess that's good. And there seem to be much smaller wars, and that's good. And we are living longer and heathier lives and that's good. But, I am astounded at the credit and financial instruments out there, esp. derivatives. No good can come of this and gold, or Canadian dollars will be a good insurance policy in all cases. Just imagine for a moment, a dollar assumes the value of a dime, and your house being worth a tenth of its vale. Where would you be? What would you do?
what will the dollar be worth in twenty years?
Maybe...
"DOLLARS OR UNITS--each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver" - Coinage Act of 1792
In 1913 the dollar was worth a dollar of the day. Now it's 3% of that amount.
Need one ask more?
I read somewhere that during the Wiemar Hyperinflation period a man bought a hotel for 1 oz of Gold. I always wondered it that was true.
I know where there is a hotel you could buy for 10 ounces of gold right now but you probably wouldn't want it.
No, not true. I posted the links to that non-story as well as other related Wiemar gold facts a while back. Not going to do the research again. There is a great picture of people in line for a movie -- paying with a small silver coin.
I was amazed, in the early 1980s, to find Israel and Turkey functioning under 60 percent inflation per year. Some "reformer' would be elected, dial back the rate to 20% and people would be absolutely delighted. One of the coping mechanisms to make things palatable would be an exchange of old money for new money. This presented an astounding number of angles for the government to play, esp. in setting the terms, conditions and deadlines for the exchanges. Schiff may be thinking of this when he mentions $20,000 house valuations. Your cash is exchanged for new shekels but your house value is set by the Gov through its new-to-old shekel exchange rate rule set (including special provisions in the exchange rate). You may keep the current value, it may go down to $20k, or it may go up in an attempt to keep the bubble viable.
The introduction of new shekels also presents lots of upside potential for banks and others upstream in the money creation chain. The introduction of "New Dollars" will be a wealth transfer mechanism that benefits many who brought us to this state of affairs.
Get rid of the Federal Reserve. Without the Fed the 2B2Jails will be out of business as they are underwater multiple times. Take all the cumulative Treasury Dept they both own and wash it out,... we're even. America's debt will be cut in half. There will be no more millions to buy Congress and the President with and the people will either elect a statesman or hoist a dictator. If Barry Soetoro had an ounce of balls he'd do the above, but he has none. He's a grocery clerk and America will either change our government drastically between now and 2012 or the Nation will spiral down into a revolution in the streets. BIS and Basil III further guarantee a world wide war as their experiment with 30x fractal banking practices will send trade into a freeze by 2019. It is no accident. No accident....
I'd rather see the banksters panhandling on the corner rather than peering out between bars. The prisons will be those with 18 holes and lounge chairs. The concrete corner with a tin cup will be a bit less hospitable.
"Get rid of the Federal Reserve."
So you'd rather have Barney Frank running the show? Bernanke isn't Paul Volker, but putting Congressmen and lobbyists in charge will not make things better.
In hyperinflation events items that satify human needs such as water and food become very expensive. Items futher down the need list such as shelter become relatively cheap.
Bernanke will not allow a dollar rout. If nothing else, his job is to make sure the USD is the last domino.
and he will not be the first or last scumbag in Washington to fail at his job
what's that New England specialty? A Grinder? Welcome to the it's evil grinder twin in market form--potentially far more deleterious than the "spectacularism" of hyperinflation or The Greatest Depression Ever. Waiting for the surge in commodities to show up on the bottom line can take a long time. There is no doubt however so long as those profit margins hold that it is GOVERNMENT bottom lines that are being eaten like the proverbial worm inside the apple. Hence the reality of "trillion dollar deficits." It is simply an axiom of sound money that government (and certainly of the American size, scope and variant) can only function with sound money. My personal view is that while it may be too late already an actual bankruptcy of an American State will be a necessity in order to preserve the Federal core. Indeed the more we wait the more we may "need more than one."
"As for mortgage debt, you will still owe $250,000 on your home the Day After, except that your home will be much more deeply underwater than before – worth perhaps $20,000 instead of $180,000."
This makes no sense, if that pile of garbage is worth more then the cash in your wallet now, what's shelter worth after a complete colapse in the value of printed paper? More then 10 cents on the dollar. That $250,000 home will likely be worth, a gold bar, a few shot guns and a dozen bags of rice.
The paper in your wallet will be used to light the log in your fireplace.
Peter Schiff is an AUSTRIAN ECONOMIST
He is not alone in his views.
Everyone should read America's Great Depression written by Murray Rothbard, one of the greatest Austrian economists to have ever walked the face of the earth.
Here it is, free of charge:
http://mises.org/rothbard/agd/contents.asp
And the Austrian view of economics continues to be validated day after day. But I understand that many have a vested interest in believing otherwise, so keep buying treasuries if it makes you feel better.
Schiff is a rentier and as such would be harmed by regular inflation. It is in his best interest to make the peasants think that inflation will lead to hyperinflation which would be bad for the peasants.
A peasant should never, ever trust a rentier. Fortunately for the rentiers most peasants have not realized they are peasants.
Inflation is incipient hyperinflation.
Schiff is just an Austrian economist running a small brokerage firm, if you think he is trying to sway people one way or another for his own interest then you are dreaming.
In fact, if Ben Bernanke did what Peter Schiff is saying he should do, then Schiffs investments would suffer. And before you go off on a rant about Schiff doing bad in 08, How did Warren Buffet do in 08 ? Is he a dumb ass too then ?
I don't know that "inflation is incipient hyperinflation" is something that can be universalized, certainly it is true under some conditions.
I don't know the guy, but I can say with 96% certainty that he is operating in his own best interest, and I can appreciate that. The thought of an altruistic money changer raises all sorts of red flags for me.
I am sure that he is not a dumb guy. He is invested in a way that he thinks will make money under the prevailing conditions. When the prevailing conditions change so will his investments. Or, he is sure that his economic prescription will never be filled.
Deflation in a fiat regime is also "incipient hyperinflation".
good point.
That will really confuse the deflationists.
And before you go off on a rant about Schiff doing bad in 08, How did Warren Buffet do in 08 ? Is he a dumb ass too then ?
10/4 Spitz, check the '09 figures for Schiff, and '10 thus far.
>"As for mortgage debt, you will still owe $250,000 on your home the Day After, except that >your home will be much more deeply underwater than before – worth perhaps $20,000 >instead of $180,000"
That's a mistake. As the dollar's value approaches zero, so will the value of the security that owns the mortgage. However, the value of the actual asset will approach infinity when priced in dollars. So, your mortgage won't be underwater. In fact, if hyperinflation hit, you could pay off your mortgage using the bills in your wallet. I'm sure you know that, you must have been thinking about your next article ... about deflation.
ManitouMike - you're absolutely right. The author should have known that inflation is the debtor's friend. Why else did Warren Buffett just take out a huge amount of debt to buy Burlington Northern? He knows that the future value of his fixed payments will be minimal.
Just explain to me why the bills in your wallet haven't approached zero then.
If, after such an event, you would get paid on your job in inflation-adjusted dollars you might easily pay of your mortgage. But likely you will either have no job anymore or get paid a lot less, inflation-adjusted.
The bills in my wallet are approaching zero. When I was a kid you might carry pennies, dimes and nickels loose in your pocket but dollar bills were carefully put into a wallet. I noticed some time in the eighties people began carrying crumpled dollar bills like pocket change.
A dollar today buys less than a dime did in 1968.
If you go back to the late 1800s you will find that a dollar buys about what a penny bought then.
Since the dollar became official currency it has lost 99% of its value.
Ahem, I was responding to ManitouMike...
Actually, everyone is spending the monopoly money so there is work to be done, employment to be had. Mass layoffs occur (again) when HI finally ends.
If you look at historical precedents, eg Weimar, you will see that during the couple of year hyperinflation lasts:
.House prices decrease very rapidly in real terms (not in nominal terms but they increase much less than the (hyper)inflation rate)
So if your house was worth $200,000 and after hyperinflation devalues the dollar by 1/1000 in a year, you house is now worth $50 million but in real terms it's worth a quarter of what it used to.
.all mortgages outstanding are converted by law to adjustable rate (you think the Govt wouldn't help the bankers and let the little guy pay off his mortgage with a worthless billion$ note?). As unemployement goes up during hyperinflation and can't keep up with their hyperinflating mortgages many end up having to give the keys to the bankers.
continuing with the example above, say your mortgage on that $200,000 house was $1000/month, it is now $1million/month for a house that's worth only $50 million
.very few new mortgages are granted, transactions are usually done in foreign currencies or weight of Gold.
.selling/buying a house takes a long time, several months, not exactly what you want to do when prices change every day and people are busy converting their hyperinflating wages every day into prime necessities (food, etc...)
So the sales of houses drops very rapidly to a tiny fraction of what it used to be.
So yes, with hyperinflation mortgage holders are rapidly underwater and those who own their house fully see its value in real terms droping rapidly. And banks end up owning many more houses. That's why usually once the old currency finally collapses and a new hard currency is introduced it is backed principally by Real Estate : the Govt takes over all these housing inventories owned by the banks and gives them the new hard currency backed by those assets.